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Thursday, 11 April 2013

How is the CSC Turnaround going?

In the 3rd quarter FY2013 results presentation it states "Turnaround is on track". This can mean many things to different people as just what 'The Turnaround' is in measurable terms is not stated in the reports. How Mr Lawrie got away with not stating clearly what The Turnaround looks like is an interesting question that we hope the analysts will now ask.Looking at one statistic, employee productivity, it seems to us there is a long way to go. Although staff numbers are reducing the actual revenue per employee is way off where it used to be in what might be called the bad old days. Just look at this chart of numbers taken from CSC's reports. Note the 2013 figure is for first three quarters only. That is why revenue perhead is factored.

Employees

Revenue

Revenue Per Employee

2013

93000

$11,592,000,000

$165,778

RPE Factored for full year effect as 2013 is Q3 YTD

2012

98000

$15,900,000,000

$162,245

2011

91000

$16,000,000,000

$175,824

2010

94000

$16,100,000,000

$171,277

2009

92000

$16,740,000,000

$181,957

2008

89000

$16,500,000,000

$185,393

2007

79000

$14,855,000,000

$188,038

2006

79000

$14,650,000,000

$185,443

This shows that revenue per employee, never mind EPS and O/I margin post tax etc., has declined these last 8 years.

We appreciate that readers of this blog can calculate their forecast on what it will take to get back to say 2007 the best of these years. But to help save you the effort here is what we have done (we have assumed headcount increases are not possible especially as many key offices and locations have been closed or sold. You might say the bridges have been burnt:-

Case 1 - Cut More Heads - Assume revenue is $16bln. Then to achieve best ever, which may not necessarily be good enough but bear with us, the headcount would have to be 85,000. A reduction of 8,000 more people. Is such a headcount reduction in the plans and are they costed? It is difficult to tell as the one statement from Mike Lawrie we can find on this subject was to achieve 'turnaround' by reducing 2,000 staff not in the front line.

Case 2 - Go For Growth with current heads. Assume headcount reductions are done, as per 2,000 target and business unit disposals, and try to go for growth with say 90,000 people. That delivers revenue of $16.9bln with best ever Revenue Per Head, which is hardly a 'turnaround'. Also is the growth there? It is not possible to say from the little information disclosed in CSC's reports.

Case 3 - Go for Growth and Headcount Reductions. No Messing as they say in Texas. Target Revenue of $17bln and Revenue per head of $200,000 assuming this is what the shareholders want. That gives a headcount of 85,000. This unfortunately all leads to the same questions as in cases 1 and 2.

Whichever way you look at it CSC has the same classic restructuring problem as the US and European economies. After years of bad management and under investment too much austerity hurts growth yet there is no money for investment and there are too many people. However the USA Treasury and European ECB can print money but CSC can't.

Comments would be welcome on this.

Footnote: recognising that people and revenue are just two of the key factors in business success we will look at other factors in future posts.Note 1: The $ figures do not take account of inflation or restatements. They are from the financial statements of each year in question. Thus current productivity is worse than ever.

Note 2: A quick look at USA Treasury official inflation rate tables shows that taking inflation into consideration the performance gap between 2013 YTD and 2007, the best year, is $44,824 or 21.3% lower now than then. That is one heck of a gap to bridge. Are the current plans on target to achieve anything like this?

above post: the number is pro-rated against the first 3 quarters results.

It's really quite simple. Employee productivity has collapsed due to low morale and poor processes, combined with weak leadership. Many of the best employees have left, and bizarrely some of the good ones are being put at risk of compulsory redudancy. Middle & senior management are protecting their backs, and there is chatter that direct reports seen as a threat, or prepared to challenge the status-quo are getting marked as potential future targets.

Without tarring all of the executives with the same brush, I have never in my entire career seen such incompetence at senior levels, which unfortunately is filtering down into critical operational functions.

I have become aware another restructuring that is to be executed within the first six months of the new fiscal year. This will officially make it the third restructuring to take place in just over 12 months. I am curious to hear what the latest spin on why we need to have additional redundancies will be since they have already used up the "we have excess staff" and "we need to offshore more."

If there was such inefficiencies in the business, I do not understand why this was not identified when they were doing it the first time around?

To me when you have to "Restructure" the business this often, it screams that the management team has no idea where the bottom is or what the end state of this journey is meant to look like.

I wanted to take an wait and see view to see how things would pan out, but I can tell you the waiting is over for me. The new CSC is not for me.

Dont forget that although the revenue per employee had dropped, the cost per employee has dropped in the extreme due to huge numbers of staff being made redundant in UK/US/Australia and the replacements being hired in Asia/SE Asia.

Dont forget that although the revenue per employee had dropped, the cost per employee has dropped in the extreme due to huge numbers of staff being made redundant in UK/US/Australia and the replacements being hired in Asia/SE Asia.

Just going by comments, I see that people are very critical of any low cost replacements (read Asian). I can assure u that things are also not great here at India as many have been asked to leave. Though may not be of same magnitude as at other places but definitely the ripple effect is to be seen here. Lot of guys are worried here & dread when they get a mail from HR for discussion. God save the Queen (CSC)..

As one of the recently laid off Australians, I feel that the real problem here is that CSC, which has for so long traded on its reputation, now has nothing left to sell.

It does not matter what your cost base is if you have nothing left to sell, and by making staff redundant just to make the share price look good, management is removing any chance of future success... What is left to sell the customers? What does CSC actually sell?

A former client said to me today, CSC used to be a powerhouse, but now it's not anything.